The Australian: Aid is not the answer to poverty [August 04, 2005]
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August 04, 2005
WE'RE rich because they're poor. No proposition is more central
to the left-wing view of the world than the idea that the rich
West survives in its comfort because it exploits the poor in the
Third World.
A variation on this lies at the heart even of much Islamist
terrorist ideology. The utterly ridiculous Peter Singer even wrote
a book purporting to work out how many dollars the rich world
should pay to the poor to make it rich too.
This thinking informs even Tony Blair's G8 aid initiative for Africa
and all the maundering self-promotion of Bob Geldof and his
claque. In reality little of the economies of the West interact
with the poor world, and thus little of the West's wealth can
possibly come from the poor.
Moreover, the moral imperative to most aid is also based on
fantasy (of course emergency aid to save lives is always
justified). A new study by the International Monetary Fund finds
that there is no correlation between aid and economic growth.
The president of the Asia Development Bank, Haruhiko Kuroda,
who is visiting Australia, told me yesterday that a large aid
inflow can cause currency appreciation which renders a
developing economy uncompetitive and therefore retards
economic growth. And the only way poverty ever declines is
through economic growth.
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The Australian: Aid is not the answer to poverty [August 04, 2005]
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Kuroda supports aid, but only if it is used effectively. He is
taking the ADB ever deeper into technical assistance and policy
dialogue with aid recipient countries, while maintaining the
bank's main role as a lender for infrastructure.
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The most fascinating recent piece of work on all this is a long
survey article by Nancy Birdsall of the Centre for Global
Development in Washington, and two collaborators, in the latest
issue of Foreign Affairs. It is a hard-headed look at what works
and what doesn't work in fighting poverty.
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Its withering treatment of aid might be seen as giving comfort to
the Right, in the sense that it promotes the idea that big
government solutions just don't work. However, it is equally
blunt in puncturing the Right's alternative myth, which is that
free market economics work in promoting growth in poor
countries. Free market economics in their way are just as useless
as aid.
Birdsall makes the truly fascinating, convincing and entirely
unfashionable case that different strokes work for different
folks. It has long been a central contention of this column that
theory in foreign affairs is almost entirely useless. Labels such as
neo-conservative, realist, liberal idealist etc have very little
analytical or even descriptive value. I'm now coming to the
conclusion that theory doesn't have much utility in international
economics either.
Birdsall takes an approach of enlightened empiricism. Compare
Nicaragua and Vietnam, she suggests. Nicaragua gets a lot of aid,
is a democracy, and has preferential access to the US market. Its
economy is a basket case. Vietnam is a communist dictatorship
and it has not even properly secured a system of property rights.
It is anything but transparent. Yet Vietnam has reduced poverty
significantly and grown at five per cent a year since 1988, which
is extremely good for such a poor country and beyond the
dreams of most African nations.
Kuroda points out that while the G8 focused on Africa, and he
has no problem with that, there are 700 million people in Asia -more than Africa's entire population -- living in poverty on less
than $US1 ($1.30) a day. But Asia has also seen the most
dramatic declines in poverty and boasts all the outstanding
success stories of development.
The most telling aspect of this success is that it all follows
different models. There is no one path to development, different
cultures and societies develop in different ways.
Birdsall examines the most successful developing nations and
discovers that none of the success stories has really followed
orthodox economic advice, nor did they get much aid. Birdsall
writes: "Would China have been better off implementing a
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The Australian: Aid is not the answer to poverty [August 04, 2005]
garden-variety World Bank structural adjustment program in
1978 instead of its own brand of heterodox gradualism? Almost
all successful cases of development in the past 50 years have
been based on creative -- and often heterodox -- policy
innovations. South Korea and Taiwan, for example, combined
their outward trade orientations with unorthodox policies:
export subsidies, directed credit, patent and copyright
infringements, domestic-content requirements on local
production, high levels of tariff and non-tariff barriers, public
ownership of large segments of banking and industry, and
restrictions on capital flows, including direct foreign
investment."
Similarly, India's stunning recent success looks nothing like East
Asia's. It is based on different policies for a different culture.
Birdsall suggests the key question is effective institutions, and
opportunities for local business. If you don't have that, both aid
and the free market are useless: "During the 1990s countries in
sub-Saharan Africa received funding amounting on average to
about 12 per cent of their GDP, while their average growth per
capita declined by 0.6 per cent."
In fact, there are many, many ways that aid can damage a
developing economy. But even external free market actions don't
help much. We Australians like to feel virtuous by arguing for
liberalisation in agriculture trade because it would not only help
us but also poor countries. But Birdsall argues the net effect on
poverty would be minor. Many poor countries are net importers
of food and would be hit by price rises.
My take-out is that knowledge of an individual culture, an
individual country's history and circumstances, and indeed of the
key individuals within its leadership, is far more important than
any general model, from the Left or the Right.
Overcoming poverty is up to poor countries themselves, an idea
unwelcome to ideologues, theorists and most academics (except
that tiny number still left in country studies) everywhere.
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